Over the last few weeks, the Chinese Technology Sector ETF KWEB has been showing some very bullish price action. After breaking out from the descending wedge at $25, the ETF followed through last week with a +13% rally last week.
This sector ETF, which is filled with Chinese technology stocks is now building significant upward momentum, and it could be starting a major bull run.
I would be remiss to exclude the usual disclaimer of investing in Chinese equities, as they do carry additional risk, but the stocks I am going to share here offer such compelling risk/reward opportunities I couldn’t help but present them.
Based on the top Zacks Ranks, deeply discounted valuations, huge EPS growth forecasts and technical setups, PDD Holdings and JD.com make for worthy stock investment consideration.
Image Source: TradingView
PDD Holdings
PDD Holdings PDD also known as Pinduoduo, is a Chinese e-commerce platform that specializes in group buying deals. Founded in 2015 by Colin Huang, PDD quickly gained popularity by offering discounted products through team purchases.
It utilizes a social commerce model, encouraging users to share deals with friends and family to unlock additional discounts. PDD’s platform is particularly popular in smaller Chinese cities and rural areas, where it has captured a significant market share. The company’s business model focuses on leveraging social networks and innovative marketing strategies to drive sales and engagement.
Revenue at PDD Holdings has exploded in the last few years, growing annual sales from $2 billion in 2018 to $35 billion in the last year. This huge pace of growth is expected to continue with sales expected to climb 50% this year and 35% next year.
Pinduoduo has also seen some hefty upgrades to its earnings estimates, giving it a Zacks Rank #1 (Strong Buy) rating. Current quarter earnings were revised higher by 27% over the last two months and FY24 have increased by 18% over the same period.
Image Source: Zacks Investment Research
PDD Holdings is currently trading at a significant discount. Its one year forward earnings multiple of 16.5x is well below the market average, and its two-year median of 25.6x.
But what makes this valuation appear especially cheap is PDD’s PEG Ratio which considers EPS growth. Over the next 3-5 years EPS are forecast to grow 49.3% annually, giving it a PEG ratio of just 0.3.
Image Source: Zacks Investment Research
JD.com
JD.com JD, also known as Jingdong, is a major Chinese e-commerce company headquartered in Beijing. It’s one of the two giants in China’s B2C (business-to-consumer) online retail market, competing head-to-head with Alibaba.
The company operates both a direct sales model and a marketplace platform, connecting consumers with merchants across China and providing a wide range of products including electronics, apparel, and groceries.
Like PDD, JD also enjoys a Zacks Rank #1 (Strong Buy) rating, reflecting upward trending earnings revisions. Analysts are also anticipating huge EPS growth, with 3–5-year forecasts of 43.8% annually.
JD.com today has a one year forward earnings multiple of 10.7x, well below the market average a massively below its five-year median of 46.6x. It also has a PEG Ratio of 0.22, a bargain based on the metric.
Image Source: Zacks Investment Research
Another notable development in JD.com is the technical setup. The price action in JD stock has been forming a textbook bottoming pattern. You can identify multiple patterns in here like a double bottom, inverse head and shoulders, cup and handle breakout, and a stage one breakout. But simply put, the stock has formed what looks like a large sideways consolidation and broken higher.
So long as the stock trades above the $29 breakout level, it should continue to rally.
Image Source: TradingView
Bottom Line
Although the wait for the return of Chinese tech stocks has been long and grueling, there seems to be potential that the bull run has begun.
One additional reason to consider diversifying into some Chinese equities is the growing uncertainty in the US equity market. Mixed signals from inflation and now shifting interest rate policy expectations are throwing a wrench in bull market, and though it may very well pass in the next few months adding some uncorrelated stocks may help in the case of a further selloff.
Finally, I should reiterate that investing in Chinese stocks comes with additional risk, as their standards and policies differ significantly from those in the US. However, if you are keen on getting exposure to the market, PDD and JD are worth diving into.
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JD.com, Inc. (JD) : Free Stock Analysis Report
KraneShares CSI China Internet ETF (KWEB): ETF Research Reports
PDD Holdings Inc. (PDD) : Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
